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Department of Defence Production

The Department of Defence Production was set up in 1962, in the aftermath of the war with China, to create an indigenous defence production base which is self-reliant and self-sufficient. Indigenisation, particularly of armaments, proceeded apace in 1963. In November, 1965, Department of Defence Supplies was created to forge linkages between the civil industries and defence production units. The two departments were merged in December, 1984 to form the Department of Defence Production and Supplies.

Since 1962, 16 new ordnance factories have been set up and their capacities have been augmented and modernised selectively keeping in mind the emerging requirements of the Armed Forces. Presently, 39 Ordnance Factories and 8 Defence Public Sector Undertakings (DPSUs) are engaged in the task of manufacture of equipment and stores for Defence Services. In addition, capacities of civil sectors are also utilised for the purpose.

India maintains an extensive defense industrial base principally owned by the government. At independence, industrialization was viewed to be the engine of growth and jobs for the rest of the economy, and since then the government has owned a large fraction of the industries and also tightly regulated the private sector. India believed that public ownership was necessary to insure developments that would benefit the entire country. India decided early that the defense industries would be owned by the public sector, and the Indian penchant to establish a "socialist pattern of society" still dominates
the defense industrial base.

India's defense industrial capacity lies in three main classes of enterprises: the Ordnance Factories (OF), the Defense Public Sector Undertakings (DPSU), and, to a much lesser extent, selected civilian public and private sector manufacturing establishments. The OFs, founded in 1801, are departmentally run government units. There are 39 OFs, grouped into five areas based on the type of armaments they produce: Ammunition and Explosives, Weapons, Vehicles and Equipment, Armoured Vehicles, and Ordnance Equipment. There are eight publicy-owned DPSUs: Hindustan Aeronautics Limited; Bharat Electronics; Bharat Earth Movers; Mazagon Dock Ltd; Garden Reach Shipbuilders and Engineers Ltd; Boa Shipyard Ltd; Bharat Dynamics Ltd; and Mishra Dhatu Nigam Ltd. Both the OFs and the DPSU's are trying to move toward greater self-reliance. The government is also trying to promote greater civil sector participation in the
armament process.

The indigenisation of defence equipment is an ongoing process and is achieved by transfer of technology and indigenous research. Indigenisation of spares of defence equipment has been undertaken in aircraft, warships, armament, tanks, vehicles and electronic as well as engineering equipment.

While the Ordnance Factories and Defence Public Sector Units (DPSUs) are manufacturing a wide range of products for the defence forces, the private sector has been involved in the supply of raw material, semi-finished products, parts and components of defence equipment. The combined value of the products of Ordnance Factories and Defence PSUs during 2000-2001 has been approximately Rs. 14000 crore as against approximately Rs. 1800 crore on import of stores (which excludes capital equipment) comprising components, spares, overhaul etc.

The Government has recently allowed private sector participation in the defence industry upto 100 per cent and with foreign direct investment permissible upto 26 per cent both subject to licensing, for manufacture of all types of defence equipment within the country. This is expected to add to the investment already made in the public sector.

The Defence industry sector has been opened for participation by Indian Private Sector upto 100 % of equity, with Foreign Direct Investment (FDI), component of it being permissible upto 26 %, both being subject to licensing permissions. This includes all types of defence equipment. Guidelines have been issued by the Department of Industrial Policy & Promotion (DIPP) in consultation with the Ministry of Defence regarding the modalities for consideration of applications for grant of licences. The private companies are allowed to apply either individually or by a partnership firm amongst themselves. The Chief Executive of the company/partnership will be a resident Indian. The company/partnership firm can have Foreign Direct Investment upto 26 % of the equity. Preference would be given to original equipment manufacturers or design establishments and those having a good track record of supplies. However, there would be a three years lock-in period for transfer of equity from one foreign investor to another foreign investor and such transfer would be subject to prior approval of Foreign Investment Promotion Board (FIPB) and the Government.

All applications from the private entrepreneurs will be considered by the Department of Industrial Policy & Promotion in consultation with the Ministry of Defence and the licenses would be granted by the DIPP. The licensees are required to put in place adequate safety and security procedures, which would be subject to verification by authorized Government agencies. The quality of the product will be assured by the Quality Assurance Agencies of the Ministry of Defence. The exports of manufactured items would be subject to policy and guidelines as applicable to Ordnance Factories and Defence Public Sector Undertakings.

The objective of the policy is to attract more investment in the Defence Sector and not to change the ownership of the Ordnance Factory Board and the Defence Public Sector Undertakings. These represent the core strength of Defence Industry in India and their continued growth and full utilisation of capacities would be encouraged by the Government.